A few days after Russia invaded Ukraine Jake Chervinskythe Blockchain Association’s Head of Policy, underscored one of Crypto’s major concerns regarding the war in a tweet.
“Russia cannot and will not use crypto to circumvent sanctions,” he wrote. “Concerns about using crypto to circumvent sanctions are completely unfounded.”
It’s not clear the right people heard his message. The next day, Senate Democrats led by Elizabeth Warren raised concerns in a letter to the Treasury Department that crypto had been used to “hide cross-border transactions for nefarious purposes” and that Vladimir Putin and his allies could use it to evade sanctions.
The crypto industry had braced itself for major battles over regulation earlier this year. But the war in Ukraine has prompted the industry to focus more on a new and thorny debate: crypto’s potential role in geopolitical conflicts and how it could be used by authoritarian rulers and their allies to shape U.S. foreign policy thwart.
Kristin Smith, executive director of the Blockchain Association, said the war is essentially a curveball. First, the group had to do “our due diligence” to “see what was actually going on so we could tell the right story.”
“We haven’t done much as a federation in terms of sanctions policy,” she told the record. This led to a cautious approach when the war began. “What we didn’t want was some sort of prediction of what was going to happen without having any evidence… We were just careful not to get ahead of our skis.”
The industry has already been at odds with regulators over whether cryptocurrencies are securities that should be more tightly regulated or whether consumers and investors are adequately protected.
But with the war, debates over whether crypto offers enough protection against money laundering and other financial crimes have come to the fore.
The issue has “an insane amount of public awareness,” ComplyAdvantage CEO Charles Delingpole told Protocol. “Understanding what is happening in relation to the underlying customers has never been so complicated for companies. It’s never been in the public eye like this.” He called it “a prime-time moment for crypto.”
Smith didn’t specifically mention the Warren letter, but she said one concern is that “there’s a small number of senators asking questions about it … and trying to use that example to bring more regulation into this space.”
The crypto industry’s position received a boost after key government agencies, from FinCEN to the FBI, said they thought it impractical for Russian oligarchs to use crypto to evade sanctions given the blockchain’s inherent transparency and traceability.
The crypto industry has also sent strong signals that it is serious about fighting money laundering and other financial crimes. Just before the start of the war, major companies such as Coinbase and Circle unveiled initiatives for blockchain-based KYC and a Treasury Department Travel Rule compliance scheme.
Crypto’s role in national security was already a big deal before the invasion of Ukraine, said Michael Philipp, a partner at Morgan Lewis & Bockius. The sanctions and war “complicate matters,” he told the transcript. “But I don’t think it will change the debate significantly.”
In fact, the war could highlight a positive side of crypto. “Ukraine was able to collect donations [with] Crypto despite a foreign adversary trying to shut down their financial system,” Diogo Mónica, co-founder and president of Anchorage Digital, told Protocol.
He said the relief efforts are a “recognition that crypto is a force for good. I think these socially uplifting use cases are really a glimpse into the future of the digital asset ecosystem,” even more than the negative aspect of sanctions evasion.
Fears of imminent government crackdown on crypto eased this week as President Joe Biden’s executive order both reiterated the need to ensure safeguards are in place and acknowledged the importance of the technology and the industry.
But there is still cause for concern for the crypto lobby.
Critics said the Biden regulation offered no clear guidance on how federal regulators should approach the industry. And in a curious twist, the title of the order posted on the White House website was revised, replacing the word “innovation” with “development,” a last-minute change that some thought heralded a more cautious stance toward it Crypto suggests.
The industry is watching as the discussion unfolds, Smith said. The big concern is that an idea or proposal “will take off and be stuffed or tied to a must-pass bill or something,” she said, without reviewing it with Treasury Department or the industry.
She cited last year’s fight over infrastructure law, which eventually included tax filing requirements for crypto industry brokers, which critics say are too broad and would cover miners, node operators and software developers who maintain blockchain networks.
“We’re trying to make sure there aren’t any rapid movements,” she said. “I think the industry has a good story to tell.”